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Working Paper
The prospect of a depreciating dollar and possible tension inside the EMS
This paper analyses the possibility of increased tensions in the European Monetary System (EMS) as a result of the recent dollar depreciation. The analysis employs a static, fairly stylized macroeconomic model in which the EMS is characterized as a means of achieving a cooperative outcome even though policymakers in member countries weigh output-inflation tradeoffs differently. Compared with the Nash (noncooperative) equilibrium, such cooperation is shown to have been welfare-improving for member countries before the depreciation of the dollar began. However, the inflationary consequences of ...